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July 08, 2013

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Luis Enrique

I think this is a bit of a straw man. Whatever a sensible interpretation of the belief "markets reward merit" is, I don't think it includes the claim that people who design brilliant computer peripherals decades before anybody wanted them will be handsomely rewarded.

Ralph Musgrave

I suffer from the same problem: no one seems to recognise me for the genius that I am.

Phil

"Fame is a fruit tree so very unsound:
It can never flourish till its stock is in the ground."

There's brilliance and then there's success; it's nice when they go together, but they're two very different things.

chris

@ Luis - I don't think it is a straw man. Some people are stupid enough to think there's a strong correlation between ability and financial success (Mankiw comes close to this in that wretched paper defending the 1%). The fact that people can be too brilliant to be rewarded is, I think, one interesting line of attack on this. There are, of course, many others.

Luis Enrique

Chris,

Well I share your contempt for Mankiw, but I think in his world rewards follow productivity, and inventing things too soon or being highly skilled at something that isn't highly valued at that point in history doesn't count as being highly productive.

That said, one of the things I dislike about Mankiw is the absence of discussion about real productivity versus revenue productivity and market structure. When it comes to thinks like football what's changed isn't so much the value fans place on it but the development of an industry that captures all the consumer surplus.

Richard Powell

There are surely two issues here, neither of which has much to do with market mechanisms. First, markets cannot reward dead people. If Drake, Buckley and Cassidy had had a normal lifespan they would have reaped the benefits of their talents, just as their surviving contemporaries are raking it in - if Brian Jones had lived he'd presumably have been at Glastonbury last week.

Second, whether the market rewards those who are a little ahead of their time may depend on intellectual property rights, which are themselves a constraint on a free market. If patents lasted longer then Englebart, Kramer and Kray would presumably have died extremely wealthy men. I'm not in a position to judge whether the world would be a better place as a result. But if patents were extended in the way that copyright has been, it would lead to the greater concentration of wealth in fewer hands.

Incidentally, shouldn't it be "converse" or "reverse" rather than "obverse"?

dsquared

Melville and Poe yes, but Scott Fitzgerald was financially successful during his lifetime; he spent a lot of money and had large expenses due to his wife's illness, but even given that he was able to support himself with an upper-middle-class lifestyle. He died of tuberculosis but it wasn't such a disease of poverty in those days.

Philip Walker

Um... the theory is that rewards flow to those who produce most utility, not those who produce who the most highly-advanced thing. Isn't it?

Otherwise, Ugg, the caveman who invented the flintlock rifle (but with no powder or shot), would be far richer than his brother Ogg, who invented the flint axehead. Ugg's contemporaries, though, philistines that they were, found more utility in a flint axehead they could use to kill mammoths over Ugg's far more advanced (but basically useless) flintlock rifle.

Strange to say, utility is not the same in all times and places.

I'm sure, Chris, that you have never written something which in hindsight did not reflect well the way you were thinking: but in the realm of us ordinary mortals it is quite possible for any given text to mangle a point like this. I think really all you are saying is that Mankiw's peer reviewer missed a bit.

Mat

Luis;

In the football example, I do feel that the two go hand-in-hand. I'm a casual football fan, and part of why I enjoy it (when I do) is the spectacle and the higher class of game that professionalism has bred. I am relatively certain that I derive greater surplus from football now, than I would have in Stanley Matthews day. More passionate fans may have lost surplus through higher costs, but then we have a discussion about relative proportions of each type of fan.

Not that the point really generalizes; but if it says anything it's that "real productivity" (in your sense) growth is almost impossible to measure. We don't really even have a theoretic framework capable of distinguishing it from revenue growth. So perhaps revenue growth IS the best available proxy.

chris

@ Philip, Richard. You're right. But I'm not saying that there's a market failure here. I'm just saying that the market does not reward "merit" (unless you defined merit circularly.) And I don't think it should.
All I'm doing here is challenging the idea that a market economy is a meritocratic one. It's not, nor can it be. The justification for free markets - which in many ways is strong - lies elsewhere.

Rich

I'm glad I don't have to pay an extra 50p every time I buy a computer mouse, just to support Doug Engelbart's relatives' lifestyle.

Luis Enrique

Mat

yes, good point.

[we do have a theoretical framework for distinguishing real productivity from revenue productivity, although you may regard it as problematic because it involve mapping goods and services onto consumer welfare]

Chris

"challenging the idea that a market economy is a meritocratic one."

I think this isn't a question of type, but one of degree. Even the most ardent free marketeer will acknowledge some role for luck etc. but they may think ability plus effort plays a larger role that you do.

imagine a model that has a role for various types of ability, effort, various kinds of luck, inherited advantages, and so forth, and asking what proportion of the variation in outcomes each factor explains. There's not going to be any sharp dividing line between meritocratic and non-meritocratic in that world, but at least if we had some vague numbers we could say broadly defined notions of merit play a small or large role, as may be.

Luke

Luis, "Even the most ardent free marketeer will acknowledge some role for luck etc."

Isn't the most ardent free market position that high pay is not a reward for ability or effort, but a signal to others that football/banking/whatever is a good line of business to be in? Once some activity becomes lucrative (say rugby becomes professional), it is more worthwhile for able people to pursue that activity.

Sorry I can't source that idea - I read about it recently. Hayek?

chris

@ Luke: it was Hayek:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/01/hayek_on_desert.html
Sadly, some of the crasser free marketers never learned from him.

Luis Enrique

"...high pay is not a reward for ability or effort, but a signal to others ..."

it's not mutually exclusive is it? Wouldn't Hayek have said that especially productive individuals are going to get paid more than useless oafs?

Churm Rincewind

Picking up on Rich's point, all the examples given in the original post are a result of a termination of intellectual property rights (whatever that may mean, and I have problems with term).

So if, for example, copyright/IP were to last for, say, a thousand years, then yes the market would indeed have rewarded merit, although of course the income would not necessarily have flowed to the originator.

Luke

Luis, how about not mutually exclusive, but also not necessarily connected. Ie useless oafs sometimes get lucky, and vice versa? And is
"most productive" quite the same as "most able" or "most meritorious"?

Chris, thanks for link.

Keith

"So if, for example, copyright/IP were to last for, say, a thousand years, then yes the market would indeed have rewarded merit..."

Really how can you write such rubbish? If my great grandfathers father invented widget x how is my large income today derived from his inventions a reward for my merits? The man is long dead who did the work I merely inherit the income stream.

Churm Rincewind

Keith, I admit that my illustration was hyperbolic. So let me specifically address your post by way of the first few examples given in the original OP.

Doug Engelbart died last week. If his patent not expired in 1987, then he would no doubt have been richly rewarded by the market. Kane Kramer is still alive, and were his intellectual property rights in the development of the digital audio player still exclusively assigned to him by way of an appropriate legislative structure, he would be a very wealthy man. George Gray died last May, and had his patents not expired in 1993, I'm sure he too would have been well rewarded. In another age Cugnot's rewards were, as Chris points out, withdrawn prematurely by the state.

My point here is simple. All these people lost out on their potential rewards purely as a result of legislative arrangements imposed by the state on the market, which would no doubt have been entirely prepared to reward (say) Doug Engelbart for his invention of the computer mouse had his patent not expired. It was the state, not the market, that determined the outcome in all these cases.

Certainly there is a case for arguing (and I take this to be your point) that an individual's right to benefit from their own inventions/creations/what you will should be a lifetime right rather than a fixed term arrangement, and current copyright law in the West makes a broad attempt to accommodate both points of view.

If, however, intellectual property is seen as exactly that - property - then it can be bought, sold, traded and inherited in excatly the same way as a piece of land. It all depends on whether you see "merit" or "worth" as lying within the individual or within the thing created.

Answers on one sheet of paper please.

isomorphismes

Just a few criticisms since I think your overall point is quite strong:

> I suspect that, in many walks of life - the arts, business and finance - financial success requires a one standard deviation intelligence.

In finance—maybe to work as a grunt μ+1σ is the right place to be. But Jim Simons and his employees have to be like μ+4σ or higher!

> Writers must be sufficiently smarter than their readers that readers feel their intelligence to be flattered, but not so much smarter that they appear weird.

Does that mean you're +1σ smarter than we are? ;)

> Investors must buy or sell ahead of the pack, but only slightly so, else they'll lose money waiting for others to catch up.

Depends on the security, doesn't it? Options have a date as does short selling. But Warren Buffett holding some shares doesn't care when the value appreciates, so long as he bought it at a low price relative to the "true value".

> Businessmen must anticipate what customers will want tomorrow, not 10 years hence.

Not so sure on this one either. CEO's of quite large businesses I think do play 3+ years ahead of the game. Acquisitions, plans that take several years to get into place, building a market position before a market takes off, etc. Think about VC's who invested in Youtube for example.


Not regarding that set of prognostications, I think your point is strongest with respect to inventors. In my opinion "popular capitalist mythology" neglects to mention that implementers usually capture returns, not instigators.

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